Guest Post by PlanetNL
End Ratepayer Funding of Hydro’s Rural Deficit Account
Part 1 of this 2-part post exposed NL Hydro’s Rural
Deficit account and the trail of regressive Government policy that created
it. It was shown that the two lowest
cost of service ratepayer groups in the province are heavily subsidizing rural
and isolated customers. This included a
subsidy so deep on the coast of Labrador that it delivers power at 70% less
than the rate paid by the Newfoundland Power ratepayers who backstop the vast
majority of the subsidy funding!
Part 2 explores what other jurisdictions with high-cost
service areas are doing and attempts to identify best practices that need to be
considered here. The PUB hearing into
Rate Mitigation Options and Impacts needs to be looking at all of these
potential actions and Government needs to relent in legislating out the regressive
subsidies and instead promote fair policies based on economic efficiency.
Rate Impact in Other Jurisdictions
the exact cost of service and rate impact in other utilities is very difficult
as rural distribution and cost of service is typically not as well-defined
elsewhere. In this regard, NL Hydro has
superior data gathering and intelligence on its rural and isolated costs. What can be found is that generally all
provinces mandate the principle of applying one consistent base rate for all
customer areas as widely as possible.
The provincial utilities having isolated diesel service areas generally
use a multi-tier rate structure with first block power set equal to their
on-grid customer rate.
recent financial documents and GRAs of the four other provincial utilities with
significant isolated diesel-service areas indicates their on-grid interconnected
ratepayers are contributing subsidy revenue, however the rate impact is almost
negligible compared to NL. In BC and Manitoba,
on-grid ratepayers are likely impacted by by 0.5- 1% while in Ontario and
Quebec, it is likely 0.1% or less. Those
are levels most on-grid ratepayers probably won’t be getting into much of an argument
over. The NL on-grid customers’ 12-16% subsidy
impacts, compounded by a future of drastic rate increases soon to come from the
Muskrat Falls project, put this province entirely in a league of its own.
for rate structure in the isolated diesel areas, Manitoba charges no premium at
all to diesel residential customers but the remaining three provinces subscribe
to the multi-tier system where the base block rate matches the main on-grid rate
but the higher rate blocks recover a little more of the costs. In Ontario and BC the upper rate is about 19
c/kWh, just a little higher than in NL. In
the case of NL’s nearest neighbour, Quebec, the upper rate is much higher at
41.43 c/kWh: despite Hydro Quebec having billions in earnings at their disposal
they are the least generous province in subsidizing isolated customers. It is apparent that Quebec subscribes to the
theory of marginal price economics as they have set the upper rate at what
appears to be the marginal cost of diesel fuel.
rate practice in the high arctic from Nunavut to Alaska is even more relevant
than the provinces. Other than in Northwest
Territories, the norm is for utilities to establish individual community rates
based on the entire cost of service of the local diesel plant. Over in Nunavut, the Government completed a
review just last year deciding it’s best to stick with the community-based
pricing system. As a result, the largest
community of Iqaluit, which with the most efficient plant, has a rate of 56.69
c/kWh while the highest rate, in much smaller Kugaaruk, is 112.34 c/kWh. The Nunavut Government subsidizes all
communities on first block energy only so that all pay half the Iqaluit rate or
28.35 c/kWh but customers are charged full local plant rates on any additional
NWT, with a population comparable to NL’s rural and isolated service areas
(Nunavut’s population is a little less), there are 4 rate zones. A single averaged rate structure exists for
diesel-service communities known as the thermal zone where first block power is
subsidized by the NWT Government (not other ratepayers) down to 30.1 c/kWh
while energy above the base amount is billed at 68.37 c/kWh.
no surprise that in all these Northern areas where actual cost of service rate-setting
exists, average household electricity consumption is significantly lower than in
the highly subsidized NL diesel communities.
for Progressive Policy, Not Regressive
problem with NL Hydro’s current rural and isolated predicament is twofold. Firstly, on-grid ratepayers should not be
forced to subsidize other ratepayers because Government chooses to shirk the responsibility
of paying for its policy actions. If
Government wants to get inventive on social policy, the cost of that policy
belongs within the Government revenue system.
second issue is that customers using high cost electricity are so heavily
subsidized they have very little incentive to mitigate cost and instead use
more electricity. This causes a high
rate of growth in the Rural Deficit account and the contributions of on-grid
ratepayers must rise. It appears Government
would prefer that on-grid ratepayers remain oblivious.
of the ratepayers paying into the Rural Deficit struggle enough to pay their
own bills and should not be forced to pay other people’s bills. If the problem remained on the scale as in
other provinces at 0.1% to 1% it would still be wrong but the severity of the
impact relatively low. Having already surpassed
12% though, this problem demands immediate reform and absolutely needs to be
part of the ongoing PUB review.
some beneficiaries of the Rural Deficit may be equally poor to many of those
who pay into it, many surely are not.
There is nothing in the administration of the policy that allocates more
benefit to poor people than well-off people.
As all customers in each zone receive the same rate subsidy, in practice
the well-off who can afford to be bigger users of electricity will benefit the
most. Poor people are paying dearly for
the comfort of many who do not need the help is a classic example of a
regressive Government fiscal policy.
matter of subsidizing high-cost service areas should never have been passed on
to ratepayers in the first place and the practice must be stopped. Subsidy for the high cost rural zones is a
matter of social policy that is the sole responsibility of Government. Ratepayers should not be held accountable for
doing what Government is afraid of which is recognizing the challenges of rural
and remote areas and dealing with it head-on.
sustaining of this bad policy, another in a long list of utility management
errors, has surely taken in excess of a billion dollars from on-grid
ratepayers. If not for Muskrat Falls, the
money should be refunded. Given the
inevitable rate hikes due to come from Muskrat – when the politician-led mitigation
myths of export profits and other energy sales are proven a fiction – the
elimination of the Rural Deficit will become a primary and absolutely pressing
Zones and Rates for NL Rural and Isolated
transferring responsibility for the subsidies back to Government, reform to
rate-setting formulas for the rural and isolated areas must be developed that
are more reflective of best practice elsewhere.
The existing level of subsidy is both indiscriminate to the economic
need of individual consumers and it provides little or no rate signal to stem
revised system must promote economic efficiency by setting rates based on the
true cost of service to a much greater degree to change consumer behaviours. The policies across the arctic region reflect
the available options. Doing so will
allow Conservation and Demand Management (CDM) efforts to maximize the
productive use of electrical energy and assets in all parts of the
province. The uptake of renewables in
diesel communities will also take off much faster as presently renewables
cannot compete with the excessively subsidized rates in force at the retail
part of the reform, segmentation of rate zones should be considered a key
opportunity. If high cost zones are
covered up through broad blending strategies as they are today, the more
difficult it will be to make the utility system more efficient. As Hydro already tracks four cost zones,
implementing revised ratemaking strategies for these four areas would be easy
to do. Going to the community-based
level as in Nunavut and Alaska could have further benefits. Given the small populations in those other
jurisdictions, there can be no argument it is an administrative burden either.
increases in rural and isolated communities would not be well received despite
the fact the overall cost of service is certain to decline. To ease the transition, Government could
continue subsidizing base energy to match the Newfoundland Power rate while
phasing in additional cost of service increases over many years. Promoting region-specific CDM and supporting renewable
energy alternatives may also diminish potential rate escalation. Detailed study may show a pathway not as bad
as some may assume while additional environmental benefits from reducing diesel
usage and new economic opportunities from renewable developments should not be
in rural and isolated zones, including the Labrador coast, should also not
forget that the existing legislated system will automatically trigger
substantial rate increases because the base rate in those zones is pegged to the
Newfoundland Power rate. When the rate
mitigation bubble bursts and the post-Muskrat rate reaches the 17 c/kWh or 23
c/kWh levels that have been reported or possibly higher, then the rural and
isolated rates shall be going up across the board as well. New realities will be unkind to all.